Usually, it is a good thing when an anchor tenant decides that it is time for a massive renovation that requires Landlord to totally renovate and redesign the shopping center. It should mean a good face lift and upgrades for the local tenants. However, there will be some challenges and pain suffered along the way, particularly if the tenant does not have protections built into its lease up front, but also if the tenant doesn’t seek and obtain protections prior to the commencement of construction.

This scenario is playing out for a local restaurant client of mine. The restaurant, a popular deli located in a Publix anchored shopping center is suffering through Landlord’s renovations of the Publix and the shopping center. To call the work “renovations” is an understatement as Publix, like it so often does with its older, smaller stores, is in the process of a total rebuild. Only the exterior walls remain. The interior has been totally gutted and the roof above the store is gone. Like so many old Publix centers, Publix sits in the middle of the shopping center, with small, local retail, including my restaurant, on either side. From the street, it looks as if Publix is not just closed, but demolished. Therefore, it looks as if the entire shopping center will also be demolished.

During the demolition work, the contractors have cut water, gas and electric lines multiple times causing my client to close down for several days. The client has suffered lost revenue and expenses including paid wages for closed days to employees, not to mention spoiled food and other lost expenses. Vibrations from construction activities, unclean work site (such as nails in the parking lot), unsafe sidewalks and no signage, have also adversely affected business. The client has contacted the Landlord through the property manager and so far, the property manager has deferred to the general contractor, arguing that all cuts in utility services are general contractor’s liability.

Client contacted me for help. The first thing to look to is the lease. The lease should have protections for disruption of utilities and services caused by Landlord, in this case through its contractors. It should have provisions regarding construction and renovation of the shopping center, maintenance of the common areas, access to the shopping center and Tenant’s premises, quiet enjoyment. signage and multiple other like provisions. Needless to say, I have seen better leases than this one.

The next question is whether Landlord approached Tenant prior to construction started. Landlord should have discussed its plans with all of the tenants and the accommodations Landlord would make to minimize disruption to each of the tenants’ businesses. Tenants could then outline their concerns so that Landlord could adjust. Expectations could be set and met. In this case, despite the fact that everyone knew Publix’ plans, work just started without any converations.

Now, here we are with loss of business damages to the client. This is a good reminder as to why it is important to consult with an attorney prior to signing any document. A properly drafted lease probably would not have stopped this Landlord from doing thing that disrupted Tenant’s business. But it sure would have given Tenant leverage and remedies when things got bad.

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        In a previous post, have written about exclusive use provisions in leases (see Everyone Benefits From Collaborative Drafting of Exclusive Use Provisions in Commercial Leases). Another clause which can be very helpful to retail tenants is the co-tenancy provision.  These provisions can be found in many shopping center leases and can be very beneficial to tenants.  Landlords, however, must be very careful when drafting them because they can come back to haunt you.

        A co-tenancy provision permits a tenant to exercise remedies if certain conditions are not met regarding the shopping center. These conditions generally are:

 

  • A key or anchor tenant executing a lease or opening for and continually operating its business; and
  • An occupancy threshold for the shopping center.

 

If conditions are not met, a tenant’s remedies could include:

 

  • Rent abatement;
  • Extension of the commencement date or rent commencement date;
  • Lease termination; or
  • Damages.

 

             Not all tenants have the leverage to negotiate co-tenancy provisions.  Small, local tenants generally don’t have the strength to convince a landlord that such a provision is a lease requirement.  However, bigger, more financially secure tenants occupying larger space are more likely to persuade a landlord to include a co-tenancy clause.  National tenants, large regional tenants and even local tenants with multiple locations will command this consideration.

             But that does not mean there is no give and take.  Landlords should seek to keep the requirement as general as possible.  The co-tenant, for instance, should not be names.  If the anchor is Target, it shouldn’t matter to the tenant if Home Depot is the anchor at a later date.  Therefore, landlord should seek to tie the co-tenancy to require only that a certain percentage of space in the shopping center be leased and operating at all times.  Tenants will push for as much specificity as possible, identifying the specific space that must be occupied and the specific tenant that must be occupying the space.  For example, the tenant might demand that Target occupy the “Target Space” (which is identified on the site plan) and continuously operate for the entire term of tenant’s lease.  Failing that, tenant’s remedy could be to reduce rent to 2% of its gross revenues each month.

             A landlord should not agree to such a broad definition or indefinite remedy without allowing for the opportunity to cure the default.  If the tenant and the specific space must be identified, landlord must have the ability to find a replacement tenant or to subdivide the space so landlord can rent to multiple tenants (thus providing adequate foot traffic).

             Clearly, any co-tenancy provision will benefit a tenant.  But a thoughtful co-tenancy provision which protects a landlord can help a tenant and will benefit the shopping center and all the tenants in the center.  When a tenant is successful, the shopping center is successful and vice versa.  Landlord and tenant need to consider that though they clearly have competing interests in drafting this provision, those interests are only adverse if the shopping center or the tenant is in trouble.  If the tenant uses the co-tenancy provision as a loophole to abate rent or seek early termination or delay commencement, the consequences to the shopping center will be harsh.  Sometimes that is necessary and required.  But sometimes, a landlord only needs a little time to fix what is only a small problem and a properly drafted clause will assure a proper fix for everyone.

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